Minneapolis May Experience An Uglier Minimum-Wage Fiasco Than Seattle

Minneapolis recently decided to jump on the minimum-wage bandwagon. This bandwagon is led by the “fight for $15” activists who are attempting to increase the minimum wage to $15 per hour for the entire country. Since a blanket minimum wage increase at the federal level is not possible, they are going to localities instead.

Under the new law, employers with more than 100 employees will start increasing wages at the onset of 2018 and reach the $15 hourly wage mark by July of 2022. Businesses with fewer than 100 will start increasing in July of 2018 and reach the $15 per hour goal by July of 2024. Currently, the minimum wage is at $9.50 for large employers and $7.75 small ones.

Just to point it out again

In 2015, Seattle implemented some drastic increases going from $9.47 to $11 per hour. The following year, the minimum wage was increased to $13 per hour.

A working paper commissioned by the city of Seattle at the University of Washington came out to show the preliminary effects of these wage increases. The results were not pretty.

Looking at solely the restaurant sector, this study, along withothers, show little to no effect from the increases in minimum wage on employment. However, this study paints a very different picture when it looks at all low-wage workers in all industries.

The number of hours worked by low-wage workers dropped by 3.5 million hours per quarter.

On average, low-wage workers saw $125 of their monthly income disappear

Businesses in Seattle reduced the income paid to low-wage workers by a total of $120 million per year.

Critics have a point

Folks more sympathetic to the idea of increasing the minimum wage to these heights have argued that this study has data limitations, and the results are much larger than previous minimum-wage studies.

They’re right!

On the other hand

The study from Berkeley that critics of the University of Washington paper point toward has its own limitations. First, it uses only the restaurant sector. Furthermore, the minimum-wage ordinance included a tip carve out, so restaurants, especially full-service ones, wouldn’t have to literally go out of business because of the wage implementation. They could keep wages for tipped employees low, because well, they get tips. Second, it also notes that Seattle already had a hot labor market in which wages were increasing. We also see neighboring counties have increases in wages and employment, especially for restaurant-sector jobs.

Now, to Minneapolis

The vote to implement a $15 minimum wage by 2024 was passed almost unanimously. Some things to note about this exciting victory in the fight for $15:

The cost of living in Minneapolis is12 percent cheaper than in Seattle. This implies that a minimum wage as high as Seattle is not only unnecessary but it also will likely have even more drastic effects on employment and income for low-wage workers.

Unlike Seattle, this ordinance does not have a tip credit toward wages. Therefore, everyone is getting the raises, including servers who receive tips and often make more than $15 per hour already. The ethical dilemma that awaits restaurant owners will be, do I increase the price of the food or do I actually fire servers and invest in iPads?

Only 5.40 percent of the working population works in the restaurant sector in Seattle. In Minneapolis, the percentage is7.56 percent. To give perspective, the national average is 5.76 percent. In Orlando, the home of Disney World Resorts and where there is a restaurant on every corner, the percentage is at 9.76 percent.

What’s more, the household income in Minneapolis is below the national average at around $50,767 while Seattle’s average household income is $67,365. This is a huge difference! The ugly findings of the Seattle study, whether they are robust enough for dissenting economists, will surely rear the same if not uglier face in Minneapolis.

Takeaway

Though these increases will not be as hastily implemented as the one in Seattle, it likely will see some ugly negative effects. It doesn’t carve out a tip credit, so unlike Seattle, the restaurant sector certainly will feel it. Finally, the fact that Minneapolis is a cheaper town with a different labor force setup that is more susceptible to this increase in the wage, will likely make the Seattle findings look mild in comparison.

Perhaps the slow implementation will help curb these effects, but only time will tell.

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Published by Kevin D. Gomez

Kevin D. Gomez is an Instructor of Economics at Creighton University and Program Manager at the Institute for Economic Inquiry. He received his B.S. in Economics and Statistics from Florida State University and his M.A. from George Mason University. Trying to pay it forward by helping noneconomists make sense of the crazy world.
View all posts by Kevin D. Gomez

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